The Role of the Chapter 7 Trustee

November 17, 2010

A Chapter 7 bankruptcy is sometimes called a liquidation bankruptcy.  In its simplest description, a Chapter 7 bankruptcy liquidates all of your property to pay your creditors.  Any remaining debt is discharged.  However, that description is not exactly accurate, or practical.  The truth is that most debtors who file Chapter 7 bankruptcy do not lose any property while erasing all or most of their debts.

 

Once your Chapter 7 bankruptcy case is filed, an impartial case trustee (sometimes called an “interim trustee” or “panel trustee”) is appointed.  The main functions of the Chapter 7 trustee are to oversee and administer your bankruptcy case.  When you file a Chapter 7 bankruptcy all of your assets are placed into a temporary “estate.”  The estate is the temporary legal owner of all property in which you have a legal or equitable interest as of the date you file bankruptcy.  The trustee examines the estate to determine whether there are assets that can be sold to pay creditors.

 

Most Chapter 7 cases are considered “non asset cases,” meaning that all the debtor’s assets are exempt or subject to valid liens.  However, when non-exempt assets are available, the trustee may take and sell these assets to pay creditors.  The Chapter 7 trustee oversees the accounting and payment of creditors from funds obtained by liquidating non-exempt assets of the debtor. 

 

The Chapter 7 trustee also presides over the debtor’s meeting of creditors required by Section 341 of the Bankruptcy Code.  The Chapter 7 trustee is usually an attorney or accountant with extensive bankruptcy law and auditing experience, but is forbidden from offering legal advice to a debtor in bankruptcy.  The trustee is under a duty to investigate the debtor’s affairs, examine the debtor under oath, and submit reports to the bankruptcy court and Office of the U.S. Trustee.  At the meeting of creditors the Panel Trustee is required to ask the debtor specific questions outlined in the U.S. Bankruptcy Code, including:

 

Did you read the schedules before signing?

Did you list all of your assets?

Did you list all of your debts?

Are the schedules accurate?

Do you want to make any corrections to the schedules?

Do you have a domestic support obligation?

 

If the trustee discovers evidence of fraud during the examination of the debtor, the case may be passed to the Department of Justice for further investigation.  The trustee may also find assets through unconventional means, such as avoiding pre-bankruptcy transactions made by the debtor in an attempt to protect assets from creditors.

 

The best advice for dealing with the bankruptcy trustee is to plan and prepare.  Use an experienced bankruptcy attorney to prepare your bankruptcy filing accurately and honestly.  When the paperwork is in order, there are no assets to liquidate, and there are no signs of fraud, the case goes smoothly and quickly.  However, when the bankruptcy schedules are inconsistent or incomplete, you may find yourself squarely on the trustee’s radar. 

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